Commodity Prices and Forecastability of International Stock Returns over a Century: Sentiments versus Fundamentals with Focus on South Africa

Afees Salisu and Rangan Gupta

Emerging Markets Finance and Trade, 2022, vol. 58, issue 9, 2620-2636

Abstract: We forecast real stock returns of South Africa over the monthly period of 1915:01 to 2021:03 using real oil, gold and silver prices, based on an autoregressive type distributed lag model that controls for persistence and endogeneity bias. Oil price proxies for fundamentals, while gold and silver prices capture sentiments. We find that the metrics for fundamentals and sentiments both predict real stock returns of South Africa, with nonlinearity, modeled by decomposing these prices into their respective positive and negative counterparts, playing an important role in terms of forecasting when a longer out-of-sample period spanning over three-quarters of a century is used. When compared to fundamentals, sentiments, particularly real gold prices, have a relatively stronger role to play in forecasting real stock returns. Further, the predictability of stock returns emanating from fundamentals and sentiments is in line with the findings over the same period derived for two other advanced markets namely, the United Kingdom (UK) and the United States (US), but the stock market of another emerging economy, i.e., India covering 1920:08 to 2021:03, unlike South Africa, is found to be completely unpredictable.

Date: 2022
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DOI: 10.1080/1540496X.2021.2007878

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